An offer in compromise (OIC) is an agreement between the taxpayer and the IRS which settles the taxpayer's tax liabilities for an amount that is less than the full amount owed. A taxpayer that can fully pay the liabilities with an installment agreement or other payment method, most likely will not qualify for an Offer in Compromise. In order to qualify for an Offer in Compromise, the taxpayer needs to have filed all tax returns, make all the required estimated tax payments for the current year. If the taxpayer is a business with employees, they must make all the required federal tax deposits for the current quarter.

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In many cases, the Internal Revenue Service will not accept an Offer in Compromise unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential. The reasonable collection potential is how the Internal Revenue Service measures the taxpayer's ability to pay. Factors the IRS uses to calculate the reasonable collection potential includes the value from the taxpayer's assets, such as real estate, vehicles, bank accounts, and other property. Another factor the IRS uses to determine the reasonable collection potential includes the anticipated future income.

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The Internal Revenue Service may accept an Offer in Compromise in three ways. First, the IRS may accept a Offer in Compromise if there's doubt as to liability. An Offer in Compromise meets this when there's a legitimate dispute as to the existence or amount of the correct tax debt. Another way it may be accepted is if there's doubt that the amount owed is fully collectible. A doubt as to collectibility exists when the taxpayer's assets and income are less than the full amount of the tax liability. Lastly, the IRS may accept an Offer in Compromise based on effective tax administration. An offer may be accepted based on effective tax administration, which means there is no doubt that the tax is legally owed and that the full amount owed could be collected, but requiring the full payment would create an economic hardship or be unfair based on the taxpayer's circumstances.